A matter of time: Will prisons be the next big ESG debate?

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Sex and the City actress Cynthia Nixon, who is running to be New York’s next governor, slammed JP Morgan Chase, BlackRock and Wells Fargo for “propping up” private prison firms CoreCivic and Geo Group at a May Day protest in Manhattan this month.
The private prisons have come under fire over allegations of human rights abuses and lobbying for laws that benefit their business, like the detention of undocumented immigrants.
Nixon said: “This whole industry that is exploding right now is propped up by debt from these major banks and these major banks should not be investing in this human suffering.”
She is the latest high-profile New Yorker to attack those with financial ties to the controversial US private prison industry.

New York City’s pension system divested $48m from private prison companies CoreCivic, Geo Group and G4S last June, citing concerns about human rights abuses and health and safety violations.

It’s an issue that has also generated a firm response from some investors, concerned, they say, about reputational and financial risks to their portfolios over the increasingly contentious topic.
New York City’s pension system divested $48m from private prison companies CoreCivic, Geo Group and G4S last June, citing concerns about human rights abuses and health and safety violations.
At the time, trustee, Bronx Borough President Ruben Diaz Jr., encouraged other investors to follow suit, saying: “In the interest of justice, other municipalities and pension funds should consider our example on the issue and move to divest from the for-profit prison industry.”
New York City’s decision came after activism by the New York State United Teachers, who in 2015 adopted a resolution to divest their pensions from private prisons.
Teachers have been at the forefront of battles to divest from private prisons, says NGO Enlace, which has been coordinating student, union and citizen prison divestment campaigns across the US.
Jamie Trinkle, Campaign and Research Coordinator at Enlace, says: “The prison divestment campaign is very much tied to teacher movements. They are tired of disinvestment in students and don’t want to invest in their potential future incarceration.”
In February, a group of California Teachers Association (CTA) representatives petitioned CTA to direct CalPERS and CalSTRS to divest from Geo Group and CoreCivic. The union’s board of directors rejected the idea and instead backed the fund’s strategy of engagement.
In other parts of the US, state senators are picking up on teacher campaigns and tabling bills to divest public pension plans from private prisons, says Trinkle. Democratic New York State Senator Brian A. Benjamin has tabled a bill to prohibit the investment of common retirement funds in private prisons. New York’s state pension fund is reported to have an $11.5m interest in the industry.
In Oregon, Democratic Senator Kathleen Taylor has tabled a bill to divest the Oregon State Public Employee Retirement system from private prisons and companies with over a million shares in Geo Group and CoreCivic.
The so-called Million Shares Club includes Bank of America, BlackRock, Credit Suisse, Goldman Sachs, JP Morgan, Morgan Stanley, Northern Trust, Prudential Financial, State Street and Vanguard.The New York City Pension Funds decision to divest last year was a big victory for the prison divestment campaign. It was the first US public pension plan to take the step, and was quickly followed by the Philadelphia Board of Pensions and Retirement, which sold $1.2m in stock in Geo Group, CoreCivic and G4S.
New York City Comptroller Scott M. Stringer told RI: “Our criminal justice system has failed a generation of Americans because, for decades, we built bigger prisons instead of greater schools, and were ‘tough on crime’ instead of ‘smart on crime’. And as President Trump ratchets up hateful rhetoric and steps up deportations, private prison companies are going to see enormous reputational harm – and that means they’ll become even riskier investments. The industry wants to turn back the clock on years of progress on criminal justice, and we refused to sit idly by and watch that happen. Divesting was the right thing to do – financially and morally.”
Prior to divesting, the Comptroller’s office and consultants analysed the financial risk and found it was minimal and would not violate fiduciary duty. Their analysis also found inherent investment risks in for-profit prison companies, with reports of a pattern physical and sexual abuse of inmates, wrongful deaths and increased violence due to improper staffing. They concluded: “These failings can lead to reputational, legal and regulatory risks – which could seriously harm investors. Because these risks are implicit in the industry, the Comptroller’s Office is unable to engage with private prison companies and encourage policies that would reduce them.”
Geo Group and CoreCivic, which have market caps of $2.9bn and $2.5bn respectively, have criticised the Comptroller’s move.
In a statement to Responsible Investor, Pablo E. Paez, Executive Vice President of Corporate Relations at Geo Group, said: “We strongly reject the New York City Comptroller’s misguided decision, which was based on political rhetoric rather than facts. First, our company does not and has never taken a position on, or advocated for or against, criminal sentencing or immigration policies. Second, our GEO Continuum of Care programme was recently awarded the American Correctional Association’s Innovation in Corrections Award for demonstrating an improved rate of returning prior offenders to their communities with the skills and resources to keep them out of prison. Third, we act as a contractor to the Government, fulfilling their directives and meeting their objectives with government oversight and onsite monitors at each facility. Finally, our 23,000 employees worldwide are proud of providing high quality services to the men and women in our care with respect and dignity. We welcome the opportunity to have a fact-based discussion to dispel the myths about the services we provide and discuss how we have been part of reducing recidivism and helping those entrusted to our care re-enter society.”
Amanda Gilchrist, Manager, Public Affairs At CoreCivic, told RI: “We simply will not tolerate the lack of honesty in the public dialogue about our company or, even worse, the incredibly serious challenges facing our country that our company is working with our partners to solve.”
Gilchrist said that CoreCivic does not lobby for proposals around detention or incarceration and said: “If the government reduced its use of services like ours, it would create a humanitarian crisis because the government doesn’t have the facilities or workforce to address this challenge. Additionally, using contractors to operate immigration detention facilities ensures that when elected leaders change policies, taxpayers aren’t left holding the bag.”
G4S declined to respond.
Concerns about investing in the industry are growing, according to Enlace, which had a record year with its divestment campaign in 2017. Some $4.1bn was divested from the private prison industry and those who finance it, it says.
And in recent years, clients have been asking their investment consultants for advice on their investments in the private prison industry.
Erin Harkless, Senior Investment Director at consultant Cambridge Associates, told RI: “It’s increasingly a topic here in the US with a couple of different categories of investors. Pension funds, colleges and universities, and foundations are seeing this as an issue with rising prominence as they think about implications for their portfolios and responding to various constituencies, such as college students engaging in activism, or mission-aligned foundations wanting to have greater harmony between their mission and endowment. Clients have ethical concerns around profiting from incarceration and the role these private prisons play in shaping the policy agenda around prisons and the rapid growth of the prison population in the US.”

“What we’ve found so far is that companies simply don’t know if they have prison labour in the supply chain.” – NorthStar’s Mari Schwartzer

According to American current affairs magazine, Mother Jones, in 2016 – a year where the Obama administration looked set to end federal support of the private prison industry – a GEO Group subsidiary gave $225,000 to a pro-Trump super-PAC. It also claims GEO Group and CoreCivic donated $250,000 each to President Trump’s inauguration fund.
In 2017, the Trump administration said it would continue to work with private prisons. Geo Group and CoreCivic spent $2.6m on federal lobbying in that year, said Mother Jones. Geo Group and CoreCivic deny advocating for or against criminal sentencing or immigration policies.
Harkless says she sees clients wanting to take a closer look at the broader issue of companies using prison labour in their supply chains (a practice in private and public prisons) and the unintended consequences of this.
NorthStar Asset Management recently published a white paper titled Prison Labor in the United States: An Investor Perspective outlining its perspective on the issue of domestic US prison labour in company supply chains, and how it is a critical issue related to economic inequality, racial justice and human rights.
Julie Goodridge, CEO of NorthStar Asset Management, said: “Our country’s capitalist economy is firmly based upon the exploitation of slaves and their descendants, and our criminal justice system has always been racially-skewed towards incarcerating people of colour. Today’s prison labour is an extension of this abuse.”
The NorthStar paper describes how prison labour is enabled by the 13th amendment of the US constitution, which outlawed slavery with the exception of forced labour as punishment of crime. As a result, nearly every able-bodied inmate in the US works in some form of labour while incarcerated.While many of those inmates perform the duties of prison upkeep, the paper argues that prison labour for the creation of supplier products that enter the open market, or services provided to companies, are more pervasive than publicly acknowledged.
Mari Schwartzer, NorthStar’s Director of Shareholder Activism and Engagement, who led the firm’s multi-year research into this issue, said: “We have begun engaging with companies in our clients’ portfolios about this issue and what we’ve found so far is that companies simply don’t know if they have prison labour in the supply chain. In fact, companies were often confused by the terminology and complex nature of prison labour.”
The issue of the so-called ‘prison industrial complex’ is also coming to the attention of ordinary, socially-motivated retail investors, according to Joshua Levin, co-founder of OpenInvest. It has created an online investment platform that allows investors to customise to their values while still having a portfolio that tracks an index, he says, and has about 1,000 users managing tens-of-millions of dollars: “They can make changes in real time and respond to news events. There is full transparency on what they own. Investors can vote in shareholder resolutions with a swipe on their smartphones.”
OpenInvest highlights causal areas that one can engage on, such as climate change, gun violence and the US prison industry – a move catalysed by a US foundation which OpenInvest consulted with.
“This foundation was doing grant-making around marginalised communities, specifically the formerly incarcerated and refugees,” says Levin. “They were horrified to find out that a lot of their endowment was going into companies that they were actively funding campaigns against. It had given one grant to an activist group protesting against privately-run incarceration centres and had $70,000 in equity financing invested in the private prison running them.”
Levin claims that OpenInvest’s platform protects investors from financial risk if they choose to pull CoreCivic and Geo Group from their portfolio: “It doesn’t just strip the private prisons out of the portfolio. That would distort the portfolio away from the index. Our system instantly breaks apart the client’s entire portfolio and trades a number of other holdings that are correlated with those divested companies on every important vector, so market cap, international exposure, historical risk factors. That’s the way the system restores the client to a beta of one with the index that they are tracking. So they can weigh in on these issues and the things they care about while the technology abstracts away the financial complexity.”
OpenInvest’s platform enables its users to divest from companies who use prison labour, sell products or services to prisons or engage in lobbying efforts around incarceration; and enables them to positively screen for listed companies that have made commitments around hiring former prisoners.

This article is one of RI’s ESG Frontiers series. Previous topics to features in the series include palm oil, shipping and opioids.

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